(6) INCOME TAXES

Income before provision for income taxes in 2010, 2011 and 2012 consists of the following (in thousands):


	2010			2011		2012
Domestic	$	139,902		$	164,996	$	180,270
Foreign		(957	)		2,810		917

	$	138,945		$	167,806	$	181,187

The differences between the United States Federal statutory income tax provision (using the statutory rate of 35%) and the Company’s consolidated provision for income taxes for 2010, 2011 and 2012 are summarized as follows (in thousands):


	2010			2011			2012
Federal income tax provision based on the statutory rate	$	48,631		$	58,732		$	63,415
State and local income taxes, net of related Federal income taxes		4,458			5,418			5,179
Non-resident withholding and foreign income taxes		10,622			12,036			12,860
Foreign tax and other tax credits		(12,622	)		(15,073	)		(14,678	)
Non-deductible expenses		1,977			2,184			1,368
Valuation allowance		—			—			868
Unrecognized tax benefits, net of related Federal income taxes		(1,847	)		(640	)		80
Other		(191	)		(212	)		(297	)

	$	51,028		$	62,445		$	68,795

The components of the 2010, 2011 and 2012 consolidated provision for income taxes are as follows (in thousands):


	2010		2011		2012
Provision for Federal income taxes –
Current provision	$	32,077	$	36,165	$	45,110
Deferred provision		4,748		7,000		3,264

Total provision for Federal income taxes		36,825		43,165		48,374
Provision for state and local income taxes –
Current provision		2,302		6,075		6,632
Deferred provision		1,279		1,169		929

Total provision for state and local income taxes		3,581		7,244		7,561
Provision for non-resident withholding and foreign income taxes		10,622		12,036		12,860

	$	51,028	$	62,445	$	68,795

As of January 1, 2012 and December 30, 2012, the significant components of net deferred income taxes are as follows (in thousands):


	2011		2012
Deferred Federal income tax assets –
Depreciation, amortization and asset basis differences	$	4,705	$	1,405
Insurance reserves		8,788		9,774
Covenants not-to-compete		2,289		1,123
Stock compensation		10,282		11,564
Other accruals and reserves		13,905		12,732
Bad debt reserves		2,969		2,868
Valuation allowance		—		(770	)
Other		3,426		5,064

Total deferred Federal income tax assets		46,364		43,760

Deferred Federal income tax liabilities –
Capitalized software		9,657		11,674
Gain on debt extinguishments		22,682		22,682
Other		2,467		1,115

Total deferred Federal income tax liabilities		34,806		35,471

Net deferred Federal income tax asset		11,558		8,289
Net deferred state and local income tax asset		4,858		3,953

Net deferred income taxes	$	16,416	$	12,242

As of January 1, 2012, the classification of net deferred income taxes is summarized as follows (in thousands):


	Current			Long-term			Total
Deferred tax assets	$	17,694		$	33,528		$	51,222
Deferred tax liabilities		(1,115	)		(33,691	)		(34,806	)

Net deferred income taxes	$	16,579		$	(163	)	$	16,416

As of December 30, 2012, the classification of net deferred income taxes is summarized as follows (in thousands):


	Current			Long-term			Total
Deferred tax assets	$	16,405		$	31,308		$	47,713
Deferred tax liabilities		(1,115	)		(34,356	)		(35,471	)

Net deferred income taxes	$	15,290		$	(3,048	)	$	12,242

Realization of the Company’s deferred tax assets is dependent upon many factors, including, but not limited to, the Company’s ability to generate sufficient taxable income. Although realization of the Company’s net deferred tax assets is not assured, management believes it is more likely than not that the net deferred tax assets will be realized. On an ongoing basis, management will assess whether it remains more likely than not that the net deferred tax assets will be realized.

For financial reporting purposes the Company’s investment in foreign subsidiaries does not exceed its tax basis. Therefore no deferred income taxes have been provided.

The Company recognizes the financial statement benefit of a tax position if it is more likely than not that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authority’s widely understood administrative practices and precedents. For tax positions meeting the “more likely than not” threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes accrued interest related to unrecognized tax benefits in interest expense and penalties in income tax expense.

During 2010, the Company accrued interest expense of $0.3 million and released interest expense previously accrued of $0.7 million and penalties of $0.4 million. At January 2, 2011, the amount of unrecognized tax benefits was $4.4 million of which, if ultimately recognized, $3.0 million would be recognized as an income tax benefit and reduce the Company’s effective tax rate. At January 2, 2011, the Company had $0.5 million of accrued interest and no accrued penalties. This amount is excluded from the $4.4 million total unrecognized tax benefit. The decrease of unrecognized tax benefits during 2010 primarily relates to state income tax matters resulting from a retroactive change in state law and the lapse of state statute of limitations.

During 2011, the Company accrued interest expense of $0.1 million and released interest of $0.2 million. At January 1, 2012, the amount of unrecognized tax benefits was $3.5 million of which, if ultimately recognized, $2.2 million would be recognized as an income tax benefit and reduce the Company’s effective tax rate. At January 1, 2012, the Company had $0.4 million of accrued interest and no accrued penalties. This amount is excluded from the $3.5 million total unrecognized tax benefit.

During 2012, the Company recorded a tax benefit of approximately $0.7 million to reflect an increased tax basis for certain Company assets due to the issuance of final tax regulations. Additionally, during 2012 and in connection with the sale of its six remaining Company-owned stores in a certain market to a franchisee, the Company recorded a deferred tax asset related to the capital loss that resulted from the write-off of the tax basis goodwill associated with the market that was sold. Management believes it is more likely than not that a portion of the deferred tax asset will not be realized and provided a valuation allowance of approximately $0.9 million. The valuation allowance was recorded as an increase to the provision for income taxes and increased the Company’s effective tax rate 2012. On an ongoing basis, management will assess whether it remains more likely than not that the net deferred tax asset will be realized.

During 2012, the Company accrued interest expense of $0.1 million. At December 30, 2012, the amount of unrecognized tax benefits was $3.5 million of which, if ultimately recognized, $2.1 million would be recognized as an income tax benefit and reduce the Company’s effective tax rate. At December 30, 2012, the Company had $0.5 million of accrued interest and no accrued penalties. This amount is excluded from the $3.5 million total unrecognized tax benefit.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


Balance as of January 3, 2010	$	6,789
Additions for tax positions of prior years		548
Reductions in tax positions from prior years for:
Changes in prior year tax positions		(2,130	)
Lapses of applicable statute of limitations		(802	)

Balance as of January 2, 2011		4,405
Additions for tax positions of current year		138
Additions for tax positions of prior years		119
Reductions in tax positions from prior years for:
Changes in prior year tax positions		(444	)
Lapses of applicable statute of limitations		(731	)

Balance as of January 1, 2012		3,487
Additions for tax positions of current year		239
Additions for tax positions of prior years		373
Reductions in tax positions from prior years for:
Changes in prior year tax positions		(111	)
Settlements during the period		(11	)
Lapses of applicable statute of limitations		(505	)

Balance as of December 30, 2012	$	3,472

The Company continues to be under examination by certain states. The Company’s Federal statute of limitation has expired for years prior to 2009 and the relevant state statutes vary. The Company expects the current ongoing examinations to be concluded in the next twelve months and does not expect the assessment of any significant additional amount in excess of amounts reserved.